John T. Crutchlow is a Partner at Youman & Caputo. Crutchlow is a former SEC Enforcement Division attorney and a former DOJ attorney who represents whistleblowers.
After a record-setting 2023, the SEC’s whistleblower program is poised to continue having a significant impact on SEC enforcement efforts this year and for the foreseeable future. In October, SEC Chairman Gary Gensler remarked that “[t]he public’s tips, complaints, and referrals are essential to our work as a cop on the beat.” It’s easy to see why given the program’s impressive track record, which was highlighted in a recent report from Better Markets.
a. Past Success Points to a Strong Future for SEC Whistleblowers.
Better Markets published a report on December 7, 2023 entitled: “A $6 billion Success Story: The SEC Whistleblower Program” detailing the program’s considerable accomplishments since its inception in 2011. Better Markets CEO Dennis M. Kelleher stated that, “the SEC’s whistleblower program has proven to be an incredibly effective law enforcement tool at incentivizing individuals to come forward and blow the whistle on illegal conduct that otherwise would not have been uncovered. By any measure, the SEC’s whistleblower program has been an unbelievable success.”
Enforcement cases that relied on information provided by SEC whistleblowers have led to $6.3 billion in monetary sanctions. The Better Markets report summarized that, “[a]s a direct result of the program, the SEC has been able to file hundreds of new enforcement actions; halt countless ongoing securities law violations; hold innumerable securities law violators accountable; prevent massive harm to investors; and put billions of dollars back in the hands of defrauded investors.”
The whistleblower program has also had a significant deterrent effect. An article published in the journal Contemporary Accounting Research in June of 2023 presents compelling evidence that the SEC whistleblower program caused “significant reductions in the likelihood of financial reporting fraud by U.S. firms following the introduction of this program.” This deterrent effect almost certainly exists across many areas of SEC enforcement, beyond just financial reporting, especially given the volume and variety of whistleblower tips that the SEC receives.
b. The SEC Received an “Unprecedented Level of Public Participation” in the Whistleblower Program in 2023.
The number of whistleblower tips submitted to the SEC has soared in recent years and demonstrates the program’s trajectory. As the SEC stated in November, “[t]he impact of the Whistleblower Program was evident in the unprecedented level of public participation in the Program in FY 2023.”
The number of whistleblower tips submitted to the SEC jumped from just under 7,000 tips in fiscal year 2020 to over 12,000 in 2021 and 2022, and then jumped again by almost 50% to set a record with over 18,000 tips in fiscal year 2023.
The Whistleblower Program’s 2023 Annual Report also demonstrates the wide breath of tips that the SEC receives. The SEC received tips relating to the Foreign Corrupt Practices Act (bribery of foreign officials), insider trading, crypto assets, corporate disclosures and financial reporting, offering frauds, securities manipulation, and other areas. Indeed, it has been widely reported that the SEC paid a record-setting $279 million whistleblower award in connection with a Foreign Corrupt Practices Act case, and the SEC received over 230 whistleblower tips related to Foreign Corrupt Practices Act in 2023.
c. Whistleblower Awards and Protections Are Critical to the SEC Program’s Success.
The Better Markets report appropriately attributes much of the success of the SEC’s whistleblower program to some of its key features – financial rewards and whistleblower protections.
The SEC provides significant financial incentives to whistleblowers, acknowledging the professional risk that many whistleblowers take when they step forward. The SEC has awarded almost $2 billion to nearly 400 whistleblowers since the inception of the program. The SEC awarded $600 million to 68 individual whistleblowers in fiscal year 2023 alone. Awards are paid from the Investor Protection Fund and do not reduce the money available to compensate fraud victims.[i]
The SEC is also empowered to protect whistleblowers,[ii] and has cracked down on retaliation and whistleblower obstruction in recent years. It has brought at least eight such cases just since 2021. The SEC’s Office of the Whistleblower recently reaffirmed its commitment to continuing these efforts: “Ensuring that individuals are free to report potential securities-related misconduct to the Commission without reprisal is crucial to the Whistleblower Program. The Commission is committed to enforcing both the rule against actions to impede reporting and the anti-retaliation protections.”
Additionally, a whistleblower can file a tip anonymously through an attorney, and the SEC will not disclose information that would reasonable be expected to reveal the identity of a whistleblower except in certain limited circumstances.[iii]
Given the whistleblower program’s past success and the ever increasing participation from the public, it is a safe bet that the whistleblower program will continue to play a big role in SEC enforcement efforts in 2024 and beyond.
[i]15 U.S.C. §§ 78u-6(b)(2), (g).
[ii]15 U.S.C. §§ 78u-6(h); 17 C.F.R. § 240.21F-17.
[iii]See 17 C.F.R. § 240.21F-7.